FINA 427 Exam 1

Carla would like to determine her financial needs during retirement. All of the following are costs she might eliminate in her retirement needs calculation except:

Carla would not eliminate her mortgage since it will not be paid off at retirement. She would eliminate the parking expense, Medicare taxes, and savings expense since she would most likely no longer have these expenses during retirement.

Andy is currently age 65 and about to retire. He has accumulated $1,539,600 in his 401(k) and would like to know what amount he could withdraw at the beginning of the first year of retirement if the purchasing power of the withdrawals will be maintained during retirement. Andy expects to continue to earn 6% on his investments, assumes inflation will be 3%, and expects to live to age 85. Which of the following is the amount of the first year distribution?

N= 20; i= ((1.06/1.03)-1)*100= 2.9126%; FV=0; PV= 1,539,600; PMT=? = 99,746

Bruno terminated employment with Philip's Bar and Grill (PBG) after completing five years of service. PBG sponsors a 401(k) profit-sharing plan with a dollar for dollar match up to 6% of compensation in which Bruno had an account balance of $50,000. Of that account balance, $20,000 was attributable to PBG noncontributory contributions and $30,000 was attributable to the combination of Bruno's deferral contributions and the equivalent employer match on those deferral contributions. Bruno has always contributed 6% of compensation. At this time, considering Bruno has terminated employment and that PBG's 401(k) profit sharing plan is not top-heavy and follows the least generous graduated vesting schedule permitted under PPA 2006, what is Bruno's vested account balance in the 401(k) profit-sharing plan?

Bruno's vested account balance is $43,000. Bruno would be 80% (2 - 6 graduated vested schedule after five years) vested in the noncontributory contributions of $20,000, or he would be vested in $16,000 of the noncontributory contributions. Bruno would be 100% vested in his own deferral contributions of $15,000 - 50% of the $30,000 remaining since it was a dollar-for-dollar match 50% must be Bruno's deferral contributions and 50% must be the employer matching contributions. Bruno would also be 80% vested in the employer matching contributions because all matching contributions must vest under either a 3-year cliff or 2-6 graduated vesting schedule. In total, Bruno would be vested in $43,000 of the account balance $16,000 + $15,000 + $12,000.

Rochelle has been reading about the FIRE movement and wants to retire as soon as possible. She is an engineer and makes $100,000 per year but can live off of $25,000 after paying her federal income tax (average of 20.35%) as well as paying her payroll tax. Rochelle is conservative and wants to assume a 7.5% annual investment rate of return and assumes that inflation will be 3% per year. Based on her family history, Rochelle expects that she will live to be 98 years old. She currently has $34,500 saved. At what age could Rochelle retire assuming she saves as much as possible after covering her needs and taxes and assuming she can live off of $25,000 in today's dollars?

Earnings = $100,000 FedEx Tax 0.2035 ($20,350) FICA 0.0765 ($7,650) Spending = ($25,000) Net Savings $47,000 Step 1 Determine the amount to be funded Income today = $100,000 WRR = 25% Needs = $25,000 Less: Social Security & Pension = $0 Amount to be funded = $25,000 Step 2 Inflate funds to retirement age PV = ($25,000) N = 10 i = 3% PMT = 0 FV = $33,597.91 Step 3 PV of retirement annuity PMT = $33,597.91 N = 58 I = 4.3689% FV = $0 PV = ($735,415.64) Step 4 Annual funding amount FV = $735,415.64 N = 10 I = 7.50% PV = ($34,500) PMT = ($46,957.37)

An individual has determined utilizing the annuity method of capital needs analysis that he needs $1,045,656 at the beginning of his retirement to meet his retirement life expectancy goals. If this individual would like to be more conservative in his retirement planning forecast and maintain this capital balance throughout his retirement life expectancy of 32 years, given an expected earnings rate of 6%, and an inflation rate of 3% during the period, how much more would he need to have at the beginning of his retirement?

N= 32; i= 6%; FV= 1,045,656; PMT= 0 PV=? = 162,032

Angelo's Bakery has 105 employees. 90 of the employees are non-excludable and 15 of those are highly compensated (75 are non-highly compensated). The company's qualified profit-sharing plan benefits 8 of the highly compensated employees and 40 of the non-highly compensated employees. Does the profit-sharing plan sponsored by Angelo's Bakery meet the coverage test?

Ratio Percentage test= 40/75= 53.3%- NHC 8/15= 53.3%- HC 53.3(NHC)/53.3(HC)=100% which is > 70% so yes the plan meets ratio percentage test.

Lynda (age 35) is a data analyst and earns $150,000 per year. She is an avid adventurer and would like to retire as early as possible. She currently pays total taxes of 40% (including state, federal, and payroll). She spends about $40,000 on required expenses, such as rent, food, etc. Although she spends a lot of money on frivolous items, she has savings of $200,000. Lynda is conservative and wants to assume a 6% annual investment rate of return and inflation of 3% per year. Based on her family history, Lynda expects that she will live to be 95 years old. Assuming she could live on $40,000 per year, how much would she have to save every year to retire at age 50?

Step 1 Determine the amount to be funded Income today = $100,000 WRR=40% Needs=$40,000 Less: Social Security & Pension=$0 Amount to be funded=$40,000 Step 2 Inflate funds to retirement age PV=($40,000);N=15;i=3.00%;PMT=0;FV=$62,318.70 Step 3 PV of retirement annuity PMT=$62,318.70;N=45;i=2.9126%;FV=0;PV= ($1,596,984.71) Step 4 Annual funding amount FV=$1,596,984.71; N=15;i=6%;PV($200,000); PMT=?=($48,018.32)

Cedric wants to retire in 15 years when he turns 65. He wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. He expects to receive $20,000 per year from Social Security in today's dollars. Cedric is conservative and wants to assume a 6% annual investment rate of return and assumes that inflation will be 4% per year. Based on his family history, Cedric expects that he will live to be 95 years old. If Cedric currently earns $100,000 per year and he expects his raises to equal the inflation rate, approximately how much does he need at retirement to fulfill his retirement goals?

Step 1 PV=$55,000 (0.75 x $100,000) - $20,000; N=15; i=4%; PMT=$0; FV=$99,051.89 Step 2 FV=0;N=30;i=1.923% [(1.06/1.04)-1] x 100; PMT=$99,051.89;PV= ?=$2,285,172

Crowne, a manufacturing company, sponsors a qualified defined benefit pension plan covered by the PBGC and a qualified profit-sharing plan. Crowne's annual covered compensation is $1,000,000 and the actuary has determined that a $200,000 contribution must be made to the defined benefit plan for the year to meet the minimum funding requirements. If Crowne would like to contribute the maximum to their defined contribution plan for the year, how much could Crowne contribute to the defined contribution plan?

Under PPA 2006, when an employer sponsors both a defined contribution plan and a defined benefit plan covering the same employees, a combined plan limit applies unless there is an exception. The combined limit states that the maximum deductible contribution is the greater of (1) 25% of compensation paid or accrued during the plan years to participants in the combined plans; or (2) The contribution necessary to meet the minimum funding requirements, but not less than the amount of the defined benefit plan's unfunded current liability. However, because the plan is covered by the PBGC, it is not subject to the combined limit.